March 16 (Bloomberg) -- Rising fuel, food and medical costs pushed U.S. inflation higher last month, giving the Federal Reserve little room to maneuver as economic growth slows.

The 0.4 percent increase in the consumer price index followed a 0.2 percent January gain, the Labor Department said today in Washington. Core prices, which exclude food and energy, rose 0.2 percent and were up 2.7 percent from a year earlier. Separate reports showed industrial production jumped the most since November 2005, while consumer confidence declined.

Persistent inflation means Fed Chairman Ben S. Bernanke will find it hard to signal an interest-rate cut when policy makers gather next week, economists said. The rebound in manufacturing, which along with housing has been a source of weakness in the economy, suggests factories are making some headway in reducing inventories.

``Not only has inflation remained stubbornly above where the Fed would like it to be, there are few signs that the price increases are decelerating much,'' said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania. ``It would be nice if the Fed had plenty of flexibility to help the sluggish economy, but it doesn't.''

The 1 percent increase in production at factories, mines and utilities was more than forecast and largely a reflection of colder weather that boosted natural gas use. Last month was the coldest February since 1994, according to the National Climatic Data Center in Asheville, North Carolina.

Capacity Utilization

Capacity utilization, which measures the proportion of plants in use, rose to a five-month high of 82 percent from 81.4 percent.

``It's probably too soon to say the inventory correction has run its course, but firms are making progress,'' said Michelle Girard, senior economist at RBS Greenwich Capital in Greenwich, Connecticut. ``As we move into the spring, auto production is looking better, and in general it looks like the bulk of the inventory reduction is behind us.''

Treasury notes weakened in the minutes after inflation and production reports were published before recovering some of their losses. The yield on the 10-year note was 1 basis point higher at about 4.53 percent at 4:11 p.m. in New York.

The Reuters/University of Michigan's preliminary index of sentiment declined to 88.8 in March, the lowest since September, from 91.3 in February. The figure compares with an average of 87.3 in 2006.

The biggest single-day plunge in the Dow Jones Industrial Average since July 2002 left Americans feeling less wealthy, and a 15-cent-a-gallon increase in regular gasoline prices put a dent in household budgets. Rising defaults on subprime mortgages added to concern that home prices would decline further.

Economist Estimates

Economists had forecast consumer prices would rise 0.3 percent, according to the median of 75 projections in a Bloomberg News survey. Estimates ranged from increases of 0.1 percent to 0.5 percent. Core prices were predicted to rise 0.2 percent, according to the survey median.

Overall prices were up 2.4 percent from the same time last year, compared with a 2.1 percent gain in January.

The CPI is the government's broadest gauge of costs because it includes goods and services. Other inflation reports this week showed wholesale prices jumped 1.3 percent in February, the most in three months, while prices of U.S. imports rose less than forecast.

Today's report showed energy prices rose 0.9 percent after a 1.5 percent decrease in January as Americans spent more to warm their homes during the coldest February in 12 years. Fuel oil costs rose 0.5 percent and natural gas prices jumped 5 percent, the most since October 2005. Gasoline prices were up 0.3 percent.

Housing Costs

Housing costs, which include some energy costs and account for one-third of the total consumer price index, rose 0.4 percent after increasing 0.2 percent in January. Owner's equivalent rent, which makes up 30 percent of the core CPI, rose 0.3 percent, after a 0.2 percent January increase.

Other measures that boosted prices included medical care, which rose 0.5 percent, and clothing, which rose 0.5 percent.

Almost 60 percent of the CPI covers prices what consumers pay for services ranging from medical visits to airline fares and movie tickets.

Food prices, which account for about a fifth of the CPI, increased 0.8 percent, the most since April 2005, after a 0.7 percent increase in January. The 5.7 percent increase in the cost of fresh fruits was the biggest since July 1988.

Grain Prices

Increased demand for ethanol is boosting grain prices and may be starting to show up in higher costs for breads, pastas and meats, according to Shenfeld.

The increase in prices is hurting workers' take-home pay. Hourly earnings adjusted for inflation fell 0.3 percent on average for a second month in February. Real hourly wages were up 1.8 percent since February 2006, compared with a 2.2 percent gain in the 12 months ended in January.

The Fed's preferred price gauge, which comes from the Commerce Department's income and spending report, rose 2.3 percent in January from a year earlier, figures issued earlier this month showed. Bernanke is among Fed policy makers that have said a 1 percent to 2 percent range would be more acceptable.

Thirteen percent more small-business owners reported higher selling prices last month, up 1 percentage point and the highest in three months, a report this week from the National Federation of Independent Business showed.

``The risk of inflation remaining too high during the forecast period is greater than the risk of growth falling too low,'' Chicago Fed President Michael Moskow said last week. ``Thus, some addition firming of policy may yet be necessary to address this inflation risk.''

To contact the reporter on this story: Courtney Schlisserman in Washington cshlisserma@bloomberg.net

Last Updated: March 16, 2007 16:39 EDT